The Euphoria over the Euro Banking agreement has sent stocks higher but the shine seems to be fading as I write.
In reality the banking side was always the easier bit to the problem in that the Banks are actual legal entities who have to operate in a fiscally responsible manner (don’t laugh) whereas national governments clearly do not. The real question is still out there, namely the pooling of EuroBond risk which the Germans are naturally averse to. Oddly enough the powers that be might not be too unhappy about a general default of Sovereign debt in the Garlic belt so long as the banking system remains intact. The markets are not sure about the intentions as can be seen from the yields in Spanish debt. Yesterday they spiked up to 7% again but this morning only sees a pull back to around 6.55% which is where we were a couple of days ago. It is worrying because the prospects of any kind of agreement out of this summit was not high so the unexpected backing of the banks should (one would have thought) have had a more positive effect on yields.
On current deficit levels Spain can no more afford 6.55% in the long run than they could 8, 10 or 15%. With virtually every EU nation either actually in recession or just about bobbing above the line we need yields down below 3 or 4% to afford room for stimulus packages. Without this the cost of sustaining the burden of debt will wipe out any impact that new spending would acheive.
Markets
Errrr.. they are UP
The FTSE fell to the support levels mentioned yesterday at 5435/40 before finding some reasonable buyer interest. The Markets were then subject to several surges through the late afternoon up to 04.00 this morning. The first from European shorts covering positions before any Summit announcements and the second at precisely the same time before the close in the US markets as the Yanks presumably did the same thing. Since 1600 yesterday the FTSE has already had a near 200 point range and we are now sitting at 5555 having hit 5620 overnight. The heavy resistance level at 5545/50 again mentioned in yesterday’s comment must now be seen as critical support. The FTSE has had quite a few attempts in recent sessions to hold above the 5520-50 range but has failed on every go. If we slip back under 5540 and then 5520 then we should beware a possible renewal of bear postioning.
Dax has rallied the most of the major indices and is still well up on the evening session yesterday. Traders will be looking at 6280/85 as an initial support area with 6245/50 being the previous rally high resistance (now support). On the up side the bulls will be looking for a takeout of the overnight highs at 6335/40 as a starter target and (if confidence can be regained a move back into the mid 6500’s.
Currencies
For some reason that is difficult to fathom the big loser overnight was the Dollar, with every cross (bar the yen) putting in solid gains versus the greenback (even the USD/CAD). This is slightly odd in that it is not more Dollars that are now going to be issued but more Euros (and probably Pounds). The stimulous package of 130bln Euro is not immediate and (in any case) as classic an example of throwing good money after bad as you are likely to see. Without sovereign fiscal control or agreements to bind governments to force through productivity improvements any stimulus to the Southern States will be merely window dressing. Our clients are very much mixed in the currency markets with Euro, Sterling, Dollar, Yen etc bulls and bears virtually exactly matching each other out.
The euro is struggling at anything above 1.2650/1.2700 but conversely does not like the pressure below 1.2400. In this environment the range trading players are able to make hay so long as they recognize a break out when it happens.
Cable is back at its perennial mid market point around1.5600, about which we have, roughly, oscillated since 2009. The chart direction/momentum/feeling is still to the down side notwithstanding the big rally overnight but the support levels below here get stronger and stronger each time we fail to slip lower. 1.5465/75 held yet again last night and we are now at 1.5615 but well off the overnight spike of 1.5680. There is good support at the 1.5600/10 level and below here at 1.5540/50. On the up side there is minor resitance at 1.5633/38 and then the high overnight at 1.5680.
Gold also bounced on the news, as the sub 1550 level yet again failed to hold for the seventh time since the break out rally of July 2011. The bounce is reasonable (as every bounce from here has been) but the bulls must be very worried about the potential for the markets if the support levels just below 1550 break. For today we can look more hopefully though as we trade at 1570 as I write with the 1574/76 then 1580/82 and then 1588 are the bull targets.
Bears as mentioned have battled to force the market lower but unless we close below 1535/1540 soon the pressure might start to build for the upside.
This comment is from Capital Spreads.
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